Steps to Financial Recovery in a Down Market

Financial concerns and economic news continue to make headlines. You may be frustrated, angered, and even shocked by recent financial events. However, it is important to realize that market declines invariably present potential opportunities.

While it may be painful to review your investments, now is the time to regroup and reassess your financial situation. You can basically take one of two directions: 1) ignore the market, don't look at your investment statements, and hope that your accounts will recover or 2) reassess your plans and investment strategy and consider opportunities that may arise with a market recovery. The problem with the first approach is that hope is not a strategy.

During this decade we have now seen two bear markets (stock market loss of 20% or more) in 2000-2002 and in 2008. You may have experienced different market cycles to see how your strategies have worked (or not worked). If you feel your investments and retirement plans are "stuck in place," then rethink your strategy. One definition of insanity is "doing the same thing over and over and expecting different results."

During market cycles, research has shown that some asset classes typically rise and fall more quickly than others depending on the stage in the market cycle (Satya Dev Pradhuman, 2000). Given that we are in a bear market, proactive investors will make tactical moves before the overall market recovers to seek the asset classes that may recover more quickly.

The following steps can help you develop a recovery strategy.

1. Acceptance - As painful as it may be, accept the reality that you have suffered some losses.

2. Take Inventory - Next, take inventory of your current situation. Check your account balances, and revisit your financial plan.

3. Reassess Goals -You may need to rethink your retirement aspirations, save more, or target a higher growth rate for your investments.

4. Critically Evaluate Your Investment Strategy - Compare your investment performance to benchmarks and to your goals. If your investments are down as much as the overall market, does this strategy make sense for your plan? If not, look at benchmarking against a "targeted rate of return" rather than the market's return. This is called "Absolute Return Investing."

5. Ask "Is Buy and Hold the Answer"? During each of the last two significant market declines, many advisors, publications, and pundits suggested "holding on" and "hanging in there." Stock prices are a function of demand and supply: if the market is dropping then there are more sellers than buyers. If you were a "buy and hold" investor, you were holding while others were selling (leaving the market). Ask yourself, "Do I need a framework to make tactical moves based on market and economic conditions?"

6. Review Costs and Fees - Check your mutual funds and brokerage accounts for fees. Are you paying an advisory fee PLUS mutual fund fees? Big fees are like getting "pecked by little ducks." At first it only hurts, but after awhile it can kill you.

7. Implement Your Changes - Take action to start the process. Take the first step by calling your spouse or partner and your financial advisor and schedule a meeting to review your situation. Get this meeting on your calendar. If you don't have a trusted advisor working in your best interest, get a second opinion from an experienced independent fee-based advisor.

Lessons Learned - Lessons can be learned from any bull or bear market. One thing investors can learn from the 2008 market is that cash is a valid asset class. There may be times to have money "on the sidelines" in a cash account instead remaining invested in the market.

In addition to helping you take steps to craft a recovery strategy, I am providing a short list of different types of investment strategies. Whichever strategy you decide on, one of the keys to successful investing is to stick to your discipline (assuming you have a discipline). Keep in mind, there is no guarantee that any strategy will ultimately be profitable nor protect against loss.

A Short List of Potential Strategies

Diversification vs. Concentrated Strategies. Some portfolios are built around diversification while others are more concentrated. Warren Buffett is a big believer of concentrated strategies (Hagstrom, 2005).

Strategic (Static) Asset Allocation vs. Tactical Asset Allocation. Tactical asset allocation seeks to overweight and underweight assets (e.g. 10-20%) depending on various factors including trends, valuations, and market cycle stages. Strategic allocation is static, the asset mix doesn't change much.

Contrarian vs. The Herd - Are you "following the pack" or do you want some "outside the box" investments.

John Dillard is a Christian Speaker/Author and Certified Public Accountant (All Rights Reserved). To See how he takes Christ along with him to work visit http://www.hiscpa.com/ (An Atlanta CPA firm) and for his latest book Overcoming Life's 9/11's: Job's Journey and to learn about his ministry visit http://www.john-dillard.com/